Blackbaud Inc (BLKB) 2012 Q4 法說會逐字稿

Greetings and welcome to the Blackbaud, fourth quarter 2012, earnings conference call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tony Boor, Chief Financial Officer. Thank you Mr. Boor, you may begin.

Thank you and good morning everyone.

Thank you for joining us today to review our fourth quarter, and full year 2012 results. With me on the call is Marc Chardon, our President and Chief Executive Officer. We both have prepared remarks, and then we will open up the call for your questions. Please note that our remarks today contain forward looking statements. These statements are based solely on present information, and are subject to risks and uncertainties, that could cause actual results to differ materially from those projected in the forward looking statements. Please refer to our SEC filings, including our most recent quarterly report on form 10-Q, our most recent annual report on form 10-K, and the risk factors contained therein, as well as our periodic reports under the Securities Act of 1934, for more information on these risks and uncertainties and on the limitations that apply to our forward looking statements.

Also, please note that a webcast of today's call will be available on the Investor Relations section of our website. During this call, we will be referring to both GAAP and non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure our Business. A reconciliation of GAAP and non-GAAP results is available in the press release we issued today, which is available on our website at Blackbaud.com. With that, let me turn it over to Marc to review our high level financial performance and business highlights. Then, I will come back at the end to provide greater details on our fourth quarter and full year results, as well as guidance for the first quarter and full year 2013.

Marc?

Thank you, Tony.

And thanks to all of you on the call for joining us today to review our fourth quarter, and full year 2012 results. We are pleased to have delivered fourth quarter non-GAAP revenue at the high end of our guidance range, and profitability that exceeded our expectations. During the fourth quarter, we had solid contributions from each of our business units, and we saw early signs of acceleration in the opportunity pipeline for Luminate products, that we acquired from Convio. Our management team also executed at a high level, with respect to identifying and realizing synergies from the acquisition, which led to better than expected cost savings, for the quarter and for the year. More recently, we initiated additional cost saving actions in January 2013, which we believe have right size our combined Company, and expense structure, and which are expected to contribute to improved profitability for our shareholders in 2013 and beyond.

We believe our efforts to improve the efficiency of Blackbaud by itself will drive increased shareholder value, in addition, while we are mindful that the macroeconomic environment remains challenging, we remain excited about the opportunity we have to leverage our best-of-breed online fundraising and CRM solutions, to gain share in our multi billion dollar market. We remain confident that Blackbaud will realize revenue synergies from the Convio acquisition over time, which we believe will drive further enhancements to shareholder value.

Let me provide a summary level view of our fourth quarter results. Non-GAAP revenue was $120.8 million, which was at the high end of our guidance. We generated non-GAAP operating income of $22.3 million, which was $2.3 million above our guidance, due to a combination of realizing deal synergies at a faster than expected pace, and some one time cost benefits that Tony will detail in a moment. As it relates to the macro environment, we view conditions in the fourth quarter as largely stable to slightly improved, after the instability we experienced mid 2012.

During the fourth quarter, there was still a level of uncertainty amongst customers, but we are hopeful that the initial resolution of the fiscal cliff negotiations will be a modest positive for nonprofit giving. It was encouraging to see the Blackbaud charitable giving index returned to modest growth in the fourth quarter, after turning negative in the third quarter for the first time since 2009. While macro conditions are still far from what would traditionally would be called robust, we believe that charitable organizations are increasingly adapting to the new normal of economic uncertainty, and are recognizing the need to improve their fundraising processes in order to thrive in this environment.

We are focused on ensuring that Blackbaud is viewed as the vendor of choice within the multi billion dollar technology market, for serving nonprofit organizations. We believe we're uniquely positioned based on our broad array of best-of-breed fundraising, CRM and back office solutions, and we expect to be a major beneficiary when the economic and charitable giving environment eventually improves.

I'd like to take a few minutes to review the performance for each of our business units, and layout our priorities for 2013, beginning with our Enterprise Customer business unit. ECBU had a solid quarter which is highlighted, by closing nine deals across our CRM offering, including new wins with Texas Christian University, the CHI Foundation and the National Deaf Children's Society. We are particularly pleased to have closed two CRM deals internationally, but we think we have significant growth opportunity over time. We also closed a deal in the $500,000 range at the lower end of the market. As we discussed last quarter, moving our CRM offering further down the enterprise market, especially in the higher education and hospital sectors, is the strategic focus for Blackbaud. As we look ahead to 2013, we are encouraged by the growth in our pipeline, an improvement in our execution in this area of our Business.

We've made a significant investment in our CRM solutions over the past five years, and it has created the most robust CRM solution in the industry. In fact, ZDNet, a leading technology news service recently rated Blackbaud as having the number one CRM offering for the second year in a row, beating horizontal CRM providers, as well as those that are focused exclusively on the nonprofit market. As we've discussed in the past, we believe there is a major systems replacement opportunity in the enterprise segment of the market over the next five years. And we believe that Blackbaud is very well positioned to capture this market. During 2012, we continued to advance our CRM capabilities, and made excellent progress by bringing our key early adopter customers into production, which we believe will help in CRM sales cycles in 2013 and beyond.

In addition to making good progress with their Blackbaud CRM offering during 2012, we continued to invest in expanding the capabilities of the Convio Luminate offering, which addresses complementary areas of our market. As we look ahead, we will be making incremental investments in Luminate in areas such as next generation user experience for team fundraising, integration with the Raiser's Edge, and with Blackbaud CRM, in order to further enhance the platform and ultimately drive faster growth. After reassuring customers of our commitment to the Luminate offering at the very end of Q3, we closed a few deals in the fourth quarter, and the Luminate pipeline stabilized and began showing initial signs of acceleration.

As we move through 2013, we are focused on continuing to build the Luminate pipeline, which is expected to lead to accelerating deal signing's over the course of the year. In fact, taken together, we believe that our expanded CRM portfolio, and positive momentum, will enable Blackbaud to close new CRM deals in the mid single digits to double digit range on a quarterly basis in 2013, which is up from our prior CRM target range of three to five deals per quarter. In addition, we remain confident that we will ultimately realize revenue synergies from our acquisition of Convio, though it will take time for our efforts to translate into the income statement, particularly considering our ratable revenue model for these pure SaaS offerings.

In our enterprise services organization, our fourth quarter results were relatively weak, though consistent with our commentary from last quarter's call. We've made good progress addressing the issues impacting our enterprise services during the fourth quarter, and Joe Moye is doing a great job implementing process improvements that we think will deliver meaningful benefits over the course of 2013. One of the primary areas we are focused on right sizing, as part of the January 2013 cost reduction efforts, was our services organization. And we believe that this will contribute to an overall improvement in our profitability going forward.

Let me turn to our general markets business unit, which posted a solid performance in the fourth quarter. The meaningful shift in the percentage of GMBU deals sold to subscriptions, continued in the quarter, outpacing license deals by greater than four to one. We were pleased with the ability of the general markets business unit to execute despite the macro headwinds, which have historically been a bigger challenge when selling to small and mid sized nonprofits. As we look to 2013, we are focusing on selling back to our installed base of Raiser's Edge customers. Raiser's Edge is hands down the best product in the market, but there is a significant opportunity to cross sell these customers on our broad suite of additional products. We will also be working on adding great functionality for our power users of the Raiser's Edge, as well as exciting cloud functionality to extend our reach to less technical users of this flagship solution.

We will be also looking to build on the success that we have had with our first vertically focused product offering, All True, and bring another vertical specific product to market during the year. Our International business had a strong quarter, highlighted by the two CRM deals I mentioned earlier. These were exciting wins, and we have a strong pipeline of CRM deals we are executing against during 2013. We also went live with our first CRM implementation in Australia during the quarter. Our international strength extended beyond CRM, with Everyday Hero posting strong results as well. We think we can build on the strength we are seeing at Everyday Hero, and bring that to a larger audience in 2013. The leadership and organizational changes that we made earlier in 2012 in our International business unit, have been highly successful, and we are confident that our International operations can represent a much more meaningful percentage of our total business over the long term.

I would like to spend a moment talking about the steps we have taken to position our organization for improved efficiency and execution and to generate profit levels that our shareholders expect, and we has management are committed to delivering. Despite the fact that our revenue faced headwinds during 2012, we did our best to protect the Company's bottom line by streamlining processes, managing costs closely, and exceeding our goal of $9 million to $10 million in annualized cost savings, as part of the Convio integration.

More recently, in January 2013, we reduce the Company's total headcount by approximately 150, a significant part of which realizes the final integration cost synergy with Convio. This action is expected to generate $9 million to $10 million of additional cost savings in 2013, and it was possible, due in part, to the initial portfolio simplification we've undertaken, which has the added benefit of freeing up resources to be deployed on other projects. To be clear, even though we rationalize our combined Company headcount to improve efficiencies in several areas of our Business, we are continuing to invest in our Business and we are actively hiring in areas that will help us execute our growth strategies.

As Tony will detail in a few moments, we believe our actions will help Blackbaud to deliver approximately 250 basis points of non-GAAP operating margin expansion in 2013. In closing, as you are all aware, we announced the CEO transition plan three weeks ago, and I will be stepping down as President and CEO by year end, or earlier, if my successor is named. It has been a privilege to lead Blackbaud over the past seven years, and I am extremely proud of what our employees and management team have accomplished. While we were forced to navigate a challenging and volatile economic environment for the second half of my tenure, we were successful in tripling the size of our revenue base, transitioning a significant portion of our business to SaaS and subscription based offerings, expanding Blackbaud's position and offerings in the highest growth segments of the market, and extending our leadership position in the nonprofit technology market. When I hand over the reins, I know that my successor will be leading a strong team, and that Blackbaud has the foundation in place to continue to achieve great things.

That said, until that time comes, I remain fully engaged in the day-to-day operations of the Company, and everyone at Blackbaud is focused on the task at hand, which is delivering improved profitability to our shareholders, and positioning the Company for accelerating revenue growth over the long term.

With that, let me turn it over to Tony to review our financial results and guidance in more detail. Tony?

Thanks, Marc.

We are pleased to have delivered non-GAAP revenue and profitability at or above our guidance ranges in the fourth quarter, due to solid execution across each of our business units, and due to solid execution against our cost synergy plans. We've made significant progress properly aligning our Company to scale in the years ahead, and to do so with greater profit margins. Our fourth quarter results included GAAP revenue of $120.1 million, and non-GAAP revenue of $120.8 million, which was at the high end of our $119 million to $121 million guidance range, and compared to $95 million in the fourth quarter of 2011.

Non-GAAP subscription revenue was $49.1 million, an increase of 78%, compared to the fourth quarter of 2011, and up from $48.3 million last quarter. It's important to note that the transaction revenue component of our subscription revenue is seasonally stronger in the second and third quarters, with the fourth and first quarter's typically being seasonally weaker.

Subscription revenue increased to a new high of 41% of our fourth quarter revenue. Up from 29% a year ago. The significant increase in our subscription revenue is due to continued growth in demand for our subscription based offerings, as well as the addition of Convio's product offerings in mid-2012. We believe this is a positive development, as it increases our long term revenue visibility. We will continue to focus on accelerating our subscription related sales as we move forward.

Maintenance revenue was $34.2 million for the fourth quarter. Our renewal rates on maintenance continue to be very high, though our license revenue continues to decline as a percentage of our revenue, as our overall revenue mix continues to shift to subscription based offerings. When combining our maintenance and sales commission revenue, our total non-GAAP recurring revenue was $83.3 million for the fourth quarter, which is an annualized recurring revenue run rate in excess of $330 million. License revenue in the fourth quarter was $4.4 million, down compared to $4.9 million in the fourth quarter of 2011, and essentially flat versus the third quarter. Professional services revenue was $29.8 million, up from $25.9 million in the year ago period, though down from $34.9 million last quarter.

The year-over-year increase was due to the addition of Convio, while the larger than normal seasonal decline in services revenue on a sequential basis, was due to the challenges we discussed last quarter. As Marc noted in his remarks, we made good progress addressing the issues that affected our services businesses in the third quarter, and began implementing process improvement under Joe Moye's leadership.

For the fourth quarter, our non-GAAP gross margin was 59%, consistent with the fourth quarter of 2011, and compared to 61% last quarter. Relative to the third quarter, the decline in our gross margin was primarily a result of previously mentioned sequential decrease in professional services revenue. Non-GAAP operating income was $22.3 million, well ahead of our guidance of $19 million to $20 million. Non-GAAP operating margin was 18.4%, representing a 170 basis point increase from the third quarter. The solid sequential improvement was driven by good expense discipline, as well as earlier and more substantial cost synergies from the Convio integration. Also in the fourth quarter, we benefited from the one-time reversal of previously accrued expenses, primarily related to a favorable outcome of a contract dispute with the vendor.

This accounted for approximately $1.3 million, of the lower than expected operating expenses in the quarter. Our non-GAAP diluted earnings per share were $0.27 for the quarter, which was $0.03 better than the high end of our $0.23 to $0.24 guidance range. Looking at our non-GAAP results for the full year, total revenue was $453 million, operating income was $75.5 million, and non-GAAP EPS was $0.95.

Turning to the balance sheet and cash flow. We ended the fourth quarter with $13.5 million in cash and equivalents, down from $25.6 million at the end of last quarter because we used cash to make incremental debt reductions during the quarter. We generated $29 million of operating cash flow in the fourth quarter. Our unlevered free cash flow, which takes into consideration capital expenditures and excludes the impact of interest expense, was $26 million.

This metric provides insight into what our cash flow for equity holders would be post paying down our debt. For the full year, we generated approximately $69 million of operating cash flow, and unlevered free cash flow of $54 million. We ended the quarter with $215.5 million of debt, down from the high point of $262 million immediately following the Convio acquisition.

I'd like to finish by turning to guidance for the full year and the first quarter of 2013. For the full year 2013, we are forecasting total non-GAAP revenue in a range of $495 million to $505 million, with a midpoint of $500 million. It's worth pointing out, that our full-year revenue guidance include a negative impact of approximately $6 million, related to two primary areas, the first being our incremental progress rationalizing and integrating our product suite, specifically the sunsetting the Common Ground, and our move to a single, best of both worlds team and event fundraising module. The second revenue headwind is due to changing contractual terms with our product partner in the ticketing area, which requires us to move from gross to net revenue recognition for sales of this related solution.

This has no impact on our profitability, but does reduce our revenue by several million dollars. From a profitability perspective, we are currently targeting a non-GAAP operating margin of 19% to 19.5%, which would represent approximately 250 basis points of year-over-year margin expansion at the midpoint. Margins will be positive -- positively impacted by getting the full year's benefit from the cost synergies we realized in 2012, as part of the Convio integration, in addition to $9 million to $10 million of additional cost savings we anticipate recognizing as part of the additional actions we recently took to right size our combined organization, as part of the merger integration process.

We are committed to delivering improved profitability to our shareholders, and the aggressive steps we've taken with our cost structure will benefit our profitability in 2013 and beyond. We also expect the investments we are making in the combined Company's product portfolio, along with our improved go to market approach, will begin to positively impact our revenue growth profile in 2013, but more so in future years, given our ratable revenue recognition model.

Below the operating line, we are forecasting interest expense of $5 million to $6 million, and a non-GAAP tax rate of 39%. Our non-GAAP tax rate excludes the GAAP tax benefit we will recognize during the first quarter, as we catch up recognition of R&D tax credit, for the fiscal year 2012, which we could not recognize last year because the extension was not passed until early 2013. This leads to full year 2013 non-GAAP EPS in the range of $1.19 to $1.25, up from $0.95 in 2012.

For the first quarter, we are forecasting non-GAAP revenue in the range of $113 million to $115 million. While we expect our maintenance revenue to grow sequentially in the first quarter, we expect other revenue lines to decline sequentially, largely due to seasonality. The first quarter is the seasonally weakest quarter for transaction volumes within our subscription revenue. It is traditionally a seasonally weaker quarter for licensed sales, with last year's Q1 being an anomaly. And our other revenue, while immaterial to our overall results and non strategic, is expected to decline by approximately $1.5 million on a sequential basis during the first quarter.

In addition, our first quarter revenue guidance reflects a portion of the full year revenue impact that I just described a moment ago. From a profitability perspective, we are targeting first quarter non-GAAP operating income between $16 million and $17 million, leading to non-GAAP EPS of $0.19 to $0.21. As you think about her first quarter expenses, please note that we will only recognize a portion of the benefit of the cost reduction program that was implemented in January. In addition, or non-GAAP operating income will exclude a restructuring charge of approximately $5.8 million, that will run through our GAAP results.

To summarize, our fourth quarter performance was solid, and we believe we made good progress in aligning the business for improved long term performance. While it takes time for the benefit of the changes we've made to fully impact our financial results, we believe our actions will help drive 200 basis points to 300 basis points of non-GAAP operating margin expansion in 2013, and provide the foundation for further margin expansion over the long term. In addition, we remain confident that Blackbaud is well positioned to be the major winner in the multi billion dollar market opportunity associated with nonprofit technology sector.

With that, we are happy to take your questions.

(Operator Instructions)

Tom Roderick, Stifel Nicolaus.

Mark, I will start with you and then say congratulations on making the announcement to the next step here. So, best of luck in finding a successor, we'll continue to work with you while you do. High level question, here, for you. Which, there may be little impact, but there seems to be a fair bit of discussion out there around it, the fiscal cliff with various reductions of charitable tax deductions. What is the view from your customers and the industry as a whole as to what impact that might have on giving, and what the trickle through might be to Blackbaud?

I think that there's probably not one view and I would hesitate to represent the view of all of my customers in one sentence. But, I think everybody's a bit nervous. On the other hand, as sort of my economics background, I looked at what happened when they put the limitations on for high income people in terms of the percentage of schedule A that can be deducted, and that didn't really change charitable giving much. And then it went away and that didn't change charitable giving much, and now it's coming back and I don't expect it's going to change charitable giving much. So, from what we've seen at this point in time, I don't really see a significant impact from tax policy of anything that we are hearing now. That said, I don't think that the economy and people's sense of -- the things like the Social Security deduction and paychecks going back up by the two points, will mean household incomes will go down by a certain extent.

So, people who do direct marketing giving and so on will feel a little bit more pinch. That $35 a year donor to a major hospital chain or something like that might be feeling just a little bit less able to continue to do that. So, I think you'll see that it's going to be a slow growth giving year. On the other hand, I think our customers are very clear that they need to invest in this kind of environment. Because it's been going on for quite some time, and I don't think they necessarily see a return to the good old days. Whatever those days were.

That's great. That's helpful. Wondering as we get through kind of lapping the Convio acquisition and you sort of stabilized some of the early downward pressures on sales, how should we think about the secular combined growth rate of the Company? And grant you, as I look through the guidance, it sort of looks like perhaps you're implying a combined growth rate on an organic basis in maybe the mid to high single digits exiting the year. A, is that a pretty good way to think about? And B, how do you think about the secular growth rate for this business?

We've had some negative impact still that will come into this year. Both in terms of the pipeline challenges we had in Q3 and started to see reverse on Q4. Many of these things, as you know, are going to take a while to show up in revenue. Because, you have implementation cycle and then it's SaaS, so the percentage of our SaaS business or our subscription business that's being 40% plus at this point, means that you would normally expect the second half of the year to look better than the first half of the year if you start to see the acceleration that we are beginning to see in [SaaS]. So, we think, over time, that there is a low to mid teens opportunity that we've talked about in the past. But, it will take longer to reaccelerate the business as it's currently configured. Each time we put that point of subscription revenue up higher, any reacceleration from a GAAP will take longer each time.

Right. Tony, last quick one for you. Just the 150 heads you mentioned have been reduced as part of the business, just this year here. Where are those mostly coming out of? Just functionally wise?

There's not any specific area that those are coming from. It's a 150 positions, we certainly look to right size our services organization. There were certain areas in the business that we weren't receiving an adequate return on. So, we exited those programs and therefore those positions were not needed. There are some that's related just to final rationalization of our cost structure. If you recall last quarter and the quarter before, we talked about we didn't want to get the cart in front of the horse. We wanted to get the product road map decisions done, integration related items done, and then would finalize the rationalization of the cost structure. That's largely what the remainder of those positions were for.

Okay. Thank you guys.

Sterling Auty, JPMorgan.

Let me add my congratulations to you, Mark. I think you have done a wonderful job with the company during your tenure. I want to touch upon, you partially answered this, but I just want to ask it anyway. It felt like in your prepared remarks there was a tone of upbeat nature when it came to some of the acceleration comments, acceleration of the pipeline and increase in targets for CRM. I wondered how that kind of matches up versus the guidance you gave for the full year? Should we take that to mean we should see steady improvement or improvement through the year or, that acceleration shows up based on how you layer in the revenue more to the back half of the year?

I think you would see some steady improvement throughout the year. I wouldn't forecast any dramatic hockey stick type view of the numbers that we are talking about. This is -- it takes a while to but a pipeline, it takes a while to move the decisions through the pipeline, it takes a while to close them, and then, it takes time to implement. I think you'll see that this looks more and more like subscription business, and so things built. And given that we have an enterprise level subscription business where the service is component in the delivery, it's going to take time to build but it will be a persistent build.

And when you look at the increase target on CRM deals, how does that match up with the rationalization ahead in services? That you will provide more partners to help effectuate that implementation? Or what will be the approach?

Well, as we've come through the CRM implementation process, we are learning along the way. So, what we've done, the first thing we've done is we've reduce the amount of effort necessary to implement a CRM deal. As you can also see by having us have had several sub $0.5 million deals over the past sort of year, that have come both internationally and in the US. And so, you need fewer people to do it. Yes, we also have some subcontracting, and some partners for professional services, as well. So, it's a mix of all three of those things.

Okay. And last question. In light of the revenue guidance and the improved margin outlook, maybe some additional context and color around how we should think about cash flow? How it shapes up seasonally through the year and maybe ideas of what 2013 might look like from a cash flow perspective over 2012?

Sterling, I will take that one. We haven't given any specific guidance to cash flow, I guess the things I would highlight, is that we are obviously guiding for a much improved profitability for 2013 versus '12. We had some rather significant one time expenses in '12 for the Convio acquisition and the related amendment to our credit facility, et cetera. We had quite a few costs for restructuring, one time in nature type outflows, CapEx, we are anticipating for 2013 that CapEx will be in that roughly $20 million to $23 million range which is relatively flat with last year, despite having a full year of Convio on board. And then we continue to have adequate levels of NOLs and tax credits yet to be utilized and '13, which will help keep our cash tax rate down for the year as well.

All right. Thank you.

Ross MacMillan, Jefferies.

Mark, good luck with your transition here and appreciate the time over the years. Maybe I can just start with a high level question. Charitable giving, I think in 2012 was flat. By my calcs, you grew about 8% organically, it looks to me like if I add back the $6 million on revenue, you are going to grow at that rate or maybe slightly lower in 2013, at least that's what's implied, I think, in the guidance. I was just curious, as to what your assumption around total giving is within that context? And then, also, is part of the reason that we are not seeing this acceleration, as I think you said a few times, just the incremental transition of the model towards more subscription? Thanks.

So, it was about 1.7%, I think, last year for the index of giving. If you take a look at the Sandy disaster giving, that was a significant portion. So, it was closer to flat than that, if you had taken out the Sandy giving. So, 2013 could very well be closer to flat, especially if you don't have a disaster sometime in the year to compare to Sandy. So, that said, disaster giving, it happens during an event and it's peak load for a donation platform. But, it's not the thing that you count on for any given year. And we've also said that, it's going to center around 2% of GDP.

The overall giving environment, I don't think that you're going to see dramatic divergence. That said, it's not -- it's not directly tied to our growth rate, either. What you are seeing, now, is primarily, as you said, there's a part of it that's the continued acceleration of the move to subscription. When general markets business sells four units of subscription to every one or five years of subscription to every one unit of perpetual license, you are starting to see some shift out. And you see more of that in the enterprise business as we move our internet offering towards the Luminate offering. So, you will see moves that continue that way. So, I would say its part the gap in pipeline opportunity we saw at the end of last year. It's part of the shift of the subscriptions and it's part the macroeconomic environment. And I wouldn't be able to handicap which of those is higher than the others right now.

Okay. Thank you. Just a follow up. I think two things. One, maintenance was down sequentially slightly but, Tony, I think you said you expect that to bounce back. I was just curious, as we go through this transition towards more subscription, how would we think about maintenance growth for '13? Do you think it will grow? Do have some price insulators that will continue to keep that growing, despite lower license sales?

Yes, Ross, maintenance for the quarter, we had some adjustments in the quarter that were, I hate using the term, but largely one time in nature. So, we would expect maintenance to actually grow sequentially going into Q1, and we also expect it to be up for the full year '13 versus '12. Software revenue, although it's become a much smaller piece of the business, is still up with some of the CRM deals. So, that would drive maintenance higher are retention rate is very good on the maintenance line. And then as you alluded to, we do have a cost-of-living adjustment, annually, that we push through. So, we expect maintenance to still be a slow but steady grower, I guess at this point.

One other subtlety that is hard to model, but is there, is that in some of the CRM deals, because of the pricing model, you don't recognize all of the price of the software as revenue. But, the maintenance is still calculated on this price. So, you could conceptually have a zero software deal that still has a maintenance component.

That's great. And then just another last one on gross margins. Clearly, service gross margins were impacted in Q4. I just, I'm curious as to what you think is a good way to think about a medium term target for services gross margins? We varied between the high 40s -- mid 40s historically, the much lower in certain quarters when you've had adjustments to services. But, what's the right sort of target or run rate that you'd like to aim toward for services gross margin? Thanks.

So, we are not giving that level of granularity. But I can give you some generalities of things that have impacted the margin. We know we've had, with some of the early adopter issues on CRM, we had a lot of non-billable hours. We also had some utilization issues that I think with Joe coming on board, he's made some real improvements and will continue to make improvements which will help margins. We are doing very well against those early adopter customers, we continue to have success stories there and continue to expect to see those non-billable hours come down, which will help services margin, as well.

Then, to a lesser extent, we had some of the shift of services moving into our subscription offerings in GMBU, that has impacted things slightly and we get recognition on those and moved out of that line. So, overall, what I can say in general is e would expect to see an improvement in services margin as Marc alluded to, that's going to take some time with the changes that we've made that Joe is putting in place, I do think we have good opportunity to see that increase.

And we've said before that there is, on the order of two or three points of overall Company margin recoverable in the professional services line, overtime. So, if you take a look at the margin degradation in recent years, I would attribute that portion of it to the services degradation.

Great. Thank you.

Matthew Kempler, Sidoti & Company.

First, just following up on the early adopters. You mentioned that all four are now in production. I'm just wondering if you can talk about any remaining deliverables in 2013 for those clients, and any remaining impact you see on the top or bottom line from those customers?

I would say that any remaining impact is sort of built into the model that we are talking about, and it's minimum. You have ongoing responsibilities with these customers. But, you've got releases and go lives in essentially all the cases at this point in time. In fact, the last site of the last EAP customer that was in that category went live on Monday to very positive outcome, I think there were 11 items on the punch list leftover, and those should be done by the end of the month. So, I would say, basically, we can put that behind us. The real challenge for the business is, now, not the cost issue that's involved there, its making those customers into even stronger references. Because the references, the reason they were EAPs is that other people look to them or see them as representative of the kind of business they would like to do with us, and so now our job is to turn them into good references.

Okay. And, then I was hoping you could characterize in a little more detail what you mean by seeing early signs of acceleration in your opportunity pipeline? And the next step is, how far away do you think we are from where you would have hoped the pipeline to be at this point in time? What do think it takes to get there?

Well, we are not going to give specific pipeline size and booking numbers. But, if you take a look at the opportunity space and you were to say that we were selling half the units that we thought we'd be selling in Q3, in our initial thinking, you wouldn't be far off. If you take a look at the win rates having been down and the pipeline having been down, some portion was win rate and some portion was pipeline. So, the thing that it takes to fix that is the EAP users of the integration between the Luminate offerings and the Blackbaud CRM and Blackbaud Raiser's Edge offerings are the key value that customers would expect to get from the integration. So, we will start seeing how the EAPs react to that in the current release of Luminate, the integration code is now in there.

And we are in the process of evaluating how that comes through, and how well that resolves the customer's needs. If the customers then feel very confident that we can do the integration effectively, that will help us accelerate it and if we have more work to do, the acceleration will be modestly slower. So, and I think that right now, we've been taking a relatively -- we've taken a relatively realistic view of the market opportunity and we've given numbers that we feel comfortable that we can cover. And if things turn out for the better, well then we might get a little more acceleration in the second half of the year based on it.

Okay. And then, lastly, I know it's still early on, but can you give us your take of what the initial funnel looks like for new candidates on the CEO level, and what are some of the key qualifications and skills that you are looking for in a replacement?

Well, I'm not going to comment on the specific steps in the process. Other than to say that we are now finalizing the choice of the search firms. So, you can infer that there are plenty of people interested in the job, because it's a really cool job. But the sorting through of it will happen after the firm is selected. In terms of qualifications for the job, I think the Board and I are looking very carefully at people who want to drive the business over a significant period of time, produce the operational excellence that you would come to expect, and take the portfolio, simplify it and drive the results. That's a combination of being responsible to the shareholder, to our customers and to our employees. So, on the other hand, the strategy and the strategic direction that we've chosen as a Board, we expect, I'm sure, to see the new candidate continue to implement that.

Okay. Thank you.

Gentlemen, we have come to the end of our Q&A session. I would like to turn the floor back over to management for closing comments.

Thank you all for joining us today and for the kind words on the seven plus years. I'm pretty sure I will see you next quarter, just anyway, because these things take a certain amount of time. To summarize the call, the fourth quarter was a solid finish to 2012, which had its challenges. Each of our business units, however, in Q4 delivered solid performance. We have seen that early signs of acceleration in the Luminate pipeline. So, we are optimistic we will see accelerating growth in 2013.

We've successfully exceeded synergy targets $9 million to $10 million in '12 and the cost savings in January will contribute to improved profitability this year, 200 basis points to 300 basis points that my friend Tony talked about. And, we finally we remain optimistic about the market opportunity ahead of the Company and I'm still absolutely confident that the enhanced position from the acquisition of Convio and the steps we've taken to improve our structure, will lead to improved growth and profitability as we go through 2013 and beyond. So, I look forward to updating you on the progress at our next earnings call in May, and thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Have a wonderful day.